USDJPY bounces off daily low and remains negative around 139.50

• USDJPY comes under further selling pressure on Tuesday amid widespread dollar weakness.
• Expectations for lower Fed rate hikes and falling US bond yields continue to weigh on the dollar.
• A positive risk tone could weigh on the safe-haven JPY and help limit the pair’s losses.

The USDJPY it retraces almost 150 pips from the daily high and falls to a new intraday low, around the 139.20-139.15 zone during the first half of the European session. At the time of writing, the pair is rebounding from the daily low and remains negative around 139.50.

The US dollar is again under selling pressure on Tuesday and hits a new three-month low, which in turn is seen as a key factor putting downward pressure on the USDJPY. Indications that the worst of the post-pandemic price rally is over reinforce the expectations that the Federal Reserve will slow the pace of its tightening in the coming months. In fact, Fed funds futures point to a greater than 90% probability of a 50 basis point rate hike at the next FOMC meeting in December, which continues to weigh on the dollar.

The revaluation of the pace of the Fed rate hike cycle is evident in a Further decline in US Treasury yields. The resulting narrowing of the US-Japan rate differential offers some support to the Japanese Yen and further contributes to the selling tone surrounding the USDJPY. Nevertheless, Speculation that the Bank of Japan will maintain its dovish policy, bolstered by weaker domestic growth numbers on Tuesday, could act as a headwind for the Japanese yen. This could limit the pair’s losses.

Government data released Tuesday showed that The Japanese economy contracted unexpectedly at an annual rate of 1.2% during the July-September quarter. The reading was well below the 4.6% growth recorded in the second quarter and the estimated 1.1% expansion. Additionally, a generally positive tone around equity markets, which tends to weigh on the safe-haven JPY, supports the prospects for some buying around the USDJPY. This, in turn, warrants caution before positioning for a further decline.

Market participants now await the US economic agenda, with the release of the Empire State Manufacturing Index and Producer Price Index (PPI) later in the American session. Apart from this, speeches by influential FOMC members and US bond yields will boost demand for the dollar. This, coupled with the broader risk sentiment, could help produce some opportunities around the USDJPY.

USDJPY technical levels